Wednesday, March 30, 2005
Price Gouging
I'm not sure what prompted me to think about this. I have nothing to link to. Just some random train of thoughts that jumped into my head. If economics are of no interest to you, best to skip this.
A few months ago, I completed a construction project on my house. The project planning began before the Florida hurricanes of last summer, but didn't actually get started until after they had occurred. So the builder had to come with revised quotes before any construction had actually started, raising the prices of the lumber and shingles that I needed by a good bit. The demand for lumber and shingles had shot through the roof, because of the hurricane damage to roofs and houses. Plywood had also gone up a lot, due to all of the people boarding up windows.
I have heard this referred to as "price-gouging", that is, companies taking advantage of disasters or calamities to charge exorbitant prices. This of course is an evil corporate thing to do, proving that they are driven only by money. Frequently, even when someone defends the practice, they defend it by saying that the company was forced by supply problems to drive up prices, so that as many people as possible would benefit from the product, which would only be possible at higher prices.
But in a free market, all economic relationships are two-way, and neither side is compelled to engage in the transaction. There is a buyer and a seller, or to look at it another way, there are two traders, both doing the same thing. Both are giving the other trader something they want more than what they have. The buyer wants the lumber more than he wants anything else he could buy with the money, and the seller wants the money more than the lumber. For a free economic exchange to take place, both sides must feel that they will benefit from the transaction. Therefore, whatever "price-gouging" occurs, both sides will still benefit.
And remember again, there are two parties to any transaction and different kinds of disasters or calamities can affect the seller as much as the buyer. Have you ever been to a "going out of business" sale? Or a hail sale? Or an estate sale? How is that different than a natural disaster driving up prices? In those cases, personal, economic or natural misfortunes are driving down the price of goods, and now the buyer is benefitting from those misfortunes instead of the seller. And yet nobody ever accuses the buyer of price gouging. Why not? The economics of the situation are pretty much the same. I know a number of people who will never pay full retail for anything, but prefer to wait for such sales. I try to take advantage of them myself. Is this wrong? Isn't this being "driven by money?" If it's wrong for a company to be driven by profit considerations in their economic choices, isn't it wrong for the individual consumer to be driven by the same thing? If not, then why is it wrong for a business to take advantage of and make a profit from events that drive up people's demand for certain goods, such as a hurricane?
Competition will ensure that the pricing in such an event doesn't get too out of control. If one lumber company doubles its prices after a hurricane, for example, another lumber company will only raise their prices by 90%, ensuring that they get all the business they can handle and still making a fat profit. And a third company will undercut that company's pricing, and so forth, driving costs down to the real cost of supplying the good. As long as there are lots of companies competing, customers will still get the best deal possible. But the statist solution to the problem, which usually is putting price caps on the products, is the best way to limit the profit possibilities of the companies, driving many of them out of business and thereby ensuring that there is less competition. It is the customers in this case which will pay the highest price, as the government-created shortage of supply ensures higher prices because of a lack of competition than would otherwise have been the case.
Just another example of how personal liberty almost always produces better results than collective statist solutions to economic problems (and most other problems too).
A few months ago, I completed a construction project on my house. The project planning began before the Florida hurricanes of last summer, but didn't actually get started until after they had occurred. So the builder had to come with revised quotes before any construction had actually started, raising the prices of the lumber and shingles that I needed by a good bit. The demand for lumber and shingles had shot through the roof, because of the hurricane damage to roofs and houses. Plywood had also gone up a lot, due to all of the people boarding up windows.
I have heard this referred to as "price-gouging", that is, companies taking advantage of disasters or calamities to charge exorbitant prices. This of course is an evil corporate thing to do, proving that they are driven only by money. Frequently, even when someone defends the practice, they defend it by saying that the company was forced by supply problems to drive up prices, so that as many people as possible would benefit from the product, which would only be possible at higher prices.
But in a free market, all economic relationships are two-way, and neither side is compelled to engage in the transaction. There is a buyer and a seller, or to look at it another way, there are two traders, both doing the same thing. Both are giving the other trader something they want more than what they have. The buyer wants the lumber more than he wants anything else he could buy with the money, and the seller wants the money more than the lumber. For a free economic exchange to take place, both sides must feel that they will benefit from the transaction. Therefore, whatever "price-gouging" occurs, both sides will still benefit.
And remember again, there are two parties to any transaction and different kinds of disasters or calamities can affect the seller as much as the buyer. Have you ever been to a "going out of business" sale? Or a hail sale? Or an estate sale? How is that different than a natural disaster driving up prices? In those cases, personal, economic or natural misfortunes are driving down the price of goods, and now the buyer is benefitting from those misfortunes instead of the seller. And yet nobody ever accuses the buyer of price gouging. Why not? The economics of the situation are pretty much the same. I know a number of people who will never pay full retail for anything, but prefer to wait for such sales. I try to take advantage of them myself. Is this wrong? Isn't this being "driven by money?" If it's wrong for a company to be driven by profit considerations in their economic choices, isn't it wrong for the individual consumer to be driven by the same thing? If not, then why is it wrong for a business to take advantage of and make a profit from events that drive up people's demand for certain goods, such as a hurricane?
Competition will ensure that the pricing in such an event doesn't get too out of control. If one lumber company doubles its prices after a hurricane, for example, another lumber company will only raise their prices by 90%, ensuring that they get all the business they can handle and still making a fat profit. And a third company will undercut that company's pricing, and so forth, driving costs down to the real cost of supplying the good. As long as there are lots of companies competing, customers will still get the best deal possible. But the statist solution to the problem, which usually is putting price caps on the products, is the best way to limit the profit possibilities of the companies, driving many of them out of business and thereby ensuring that there is less competition. It is the customers in this case which will pay the highest price, as the government-created shortage of supply ensures higher prices because of a lack of competition than would otherwise have been the case.
Just another example of how personal liberty almost always produces better results than collective statist solutions to economic problems (and most other problems too).
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